Recruitment Agencies are a thing of the past.
Some agency managers will think, “that’s been said before -- look at what everyone thought when LinkedIn started. Every company built their own teams and thought agencies would be done away with. But over the last decade, agencies have been the biggest users and revenue generators for LinkedIn, and we’re thriving.” There’s truth in that, but hear me out.
First, let’s look at why recruiting agencies exist.
Just like other brokerage companies (real estate, etc.), recruiting agencies used to thrive not just because they were useful, but because they were necessary, providing inaccessible information. There was no way to even know who was out there, let alone be confident you found the right person, without using an agency. Let’s call this era Modern Recruitment Age Zero.
In Age Zero, agencies provided information: recruiting teams would scour the yellow pages and other paper directories of people to create folders upon folders of records and resumes of people who could contribute to their clients' enterprise. This was hard discovery work, coupled with the performance psychology required of all salespeople. The best agencies set up specialized Switchboard Profit models, having a large set of clients from a particular industry on one side, and a pool of relevant, pre-qualified candidates on the other side.
With the rise of digital job boards and digital social networks, there was a major shift in how everyone looked at recruiting. No longer was information inaccessible. Everyone and their mother are now public on social networks, and the data is out there for all to see. But as everyone who plays in this space knows, information is hiding in plain sight.
Good recruiters, though, are still able to navigate the relationships and nuances of skill that companies need insight into, insight that social networks are still far from providing much direct knowledge of. While this is mostly where we’re living now, let’s circle back to agencies and a list of problems.
Three Reasons Recruiting Agencies are Losing Ground
Reason 1. Poor Agency Reviews. If you read Glassdoor review pages of most recruiting agencies, you’ll find the same: “They track numbers 3 times a day,” “Compensation potential is over-promised,” “My manager is an asshole,” “The 7 people on my team are all new in the past 3 months except for 1,” “It’s an old-boys club,” “Rather than seeing Wolf of Wall Street as a comedy, I think they’re using it as a manual.”
A lot of agencies will want to say, “but we're different,” and a few may be telling the truth. But the fact that so many are exactly like this is more of an indication of a systemic problem, not just that there are a few bad apples.
Reason 2. We Did the Math. LinkedIn Database Wins. It’s rare for an agency to have a more useful database than LinkedIn. (Dirty little secret: Most recruiters now ignore their database in favor of spending all of their time on LinkedIn).
Just think for a second about the math of LinkedIn’s database versus a recruiter database. Let’s take an analogy of a database I used to use. We had 55,000 candidates, 99% of whom worked for technology companies within a metropolitan region. A pretty damn good database that was built and constantly updated by the sweat of aggressive recruiters, something to be proud of. We updated resumes, tracked and prioritized personal motivations, ranked skills based on refined skills lists, and we knew who was happy in their jobs or not. Give us a search requirement, and we had some potential candidates within a day or two, sometimes within the hour.
A lot of agencies still practice this level of disciplined precision, but here's where this information starts to lose value: Over time, 5 to 10 agencies in every given market have EXACTLY the same information. Do a call with your top 3 agencies and it will be a mad dash to represent the exact same 2 to 3 candidates who are ALWAYS looking for new jobs. Would you rather just hire from the 3 most obvious candidates?
Bringing this back to the math of the LinkedIn database. In most regions, in my experience, LinkedIn has about 5 to 10 times the number of professionals in an industry and region that the best recruiter databases have. In rare, niche cases, this may be as low as 2 to 3 times.
Let's take the lower 3 times number for now. Back to the 55,000 number above, this would be about 150,000 people. Even for the 55,000 people, a team of 15 aggressive recruiters would need to speak with 50 different people every week, without holidays, to get to just 39,000. (This is possible. This is why recruiting agencies are often so aggressive -- they are trying to keep up with the information game in this way.)
Let’s assume the recruiting agency is a little bit smarter and sends out regular surveys to professionals they know to save some time on understanding current situations. This is what makes 3- to 5-person teams possible. But you’ve lost a lot of the relationship now.
Contrast that with LinkedIn, where you have a 1:1 relationship (everyone updating their own profiles) between people updating their 150,000 profiles: resumes, skills, references, and "open to new opportunities.” AND, LinkedIn can present DAILY information on all 150,000 profiles, without any form of aggression from recruiters trying to play a 1:4,000-10,000+ game. Granted, you’re losing a lot of the subtlety that LinkedIn is still very weak at collecting.
Reason 3. Hiring An Internal Recruiter Saves Companies Money AND Pays Recruiters Better. Recruiters are now beginning to go “internal" to work directly for their clients. Driven largely by the Enterprise realization that rather than paying $200,000 to hire 4 high-level professionals, they can bring on a good recruiter internally and pay a good salary (maybe that same amount, all-inclusive), and get 10 to 20+ hires from that person. An easy financial decision, right?
Since so many companies have realized recruiting tools and platforms are stronger than agency capabilities, and since agencies largely represent places people don’t want to work (remember the Glassdoor reviews?), most recruiting professionals are rushing to work for companies to recruit directly for them. I would also say that most people I have met throughout the years started recruiting and were most fulfilled in the recruitment profession by the mission of helping managers build teams. It’s just that many failed at the sales aspect or unfortunately gave up on the mission to succeed in the sales aspect. I don’t have the exact data, but from what I can tell both in terms of companies’ desire to bring recruiters in-house and the challenges of keeping recruiters in agencies, my guess is that these trends are accelerating, rather than having reached an equilibrium, as most agency managers and investors might think.
On one hand, I don’t like this trend. Here are some of the negative effects I’m seeing:
– Professionals losing the power of job choice that agencies can help give. It’s one of the trendlines that coincides with the ultra-corporatization and monopolization of industries.
– Many recruiters are losing their navigational skills. Relying on the low-hanging fruit that LinkedIn and direct applicants provide, recruiters are losing their search skills and capabilities of skill-differentiation, in favor of coordination and scheduling activities.
– Recruiters are still facing the churn and burn within companies. It’s rare to see recruiters stay at a company for more than 2 years, whether by choice or external pressures.
– Companies aren’t getting “field” expertise from many of their recruiters anymore. There is some very particular extra information recruiters can provide per search, but the overarching knowledge of a market that agency recruiters can have (more than 50% never get to this point) is rarely gained and often lost when working “internal” at a company.
On the other hand, the pressures driving this trend are largely positive:
– A lot of the cash that was going toward agency owners is now shifted back to the hands of companies and enabling the median recruiter to earn more. This is done by increasing productivity and pushing the middleman out:
– Most recruiters can realize "placement" productivity gains of 2 to 4x per month when not on the agency side. This is both due to the company processes and information that can be leveraged, as well as the removal of risk inherent in agency recruitment (agencies are never sure of whether their candidates can be chosen, forcing them to spread eggs out across many baskets)
– As an example, a $30K fee to an agency would send about $7K to 10K to the recruiter, in principle. With an in-house recruiter, that $50K cost can bring in 4 candidates, while doubling the median recruiters pay per year.
– Recruiters are much more cognizant of what a company and manager needs, deeply understanding (in theory) what the team is actually doing and who will fit in.
– Candidates get direct feedback on the process. With agencies, information is often 2 to 3 steps removed, and candidates don’t really know what is going on.
– Recruiters get to see more of the fruits of their labor.
– The work style of a recruiter can be much more reasonable and engaging.
What will seal the nail on the coffin of the recruitment agency? Two trends.
Firstly, managers and executives have mostly wised up to the fact that consulting models can take the pain out of having an open position throughout the period of a recruiting search. Staffing, consultants, and consulting organizations can allow companies to get needed work done while a thorough Quality of Hire search is done.
Secondly, the Modern Recruitment Age: Professionals with Automation is upon us. LinkedIn is about two orders of magnitude behind what recruiters will soon be able to do with automation principles. LinkedIn is doing a lot to move forward, and other tools and theory will make even more possible. Here are three big ones:
1) Skills theory: Recruiting agencies used to be better at identifying skills people have, but I would say we have hit a momentary dip in the capability of recruiters in understanding and quantifying professional skills, agencies because of the need to speed up the sales cycles, and internal recruiters because of the move toward coordination activity. This dip in the skills-navigation skill will pass. Whether through the theory of Daniel Kahneman, the observations of Tim Ferris, or the accessibility of Khan Academy, the understanding and application of job skills is facing a coming Cambrian explosion.
2) Machine Learning: Hiretual, Tobu, and others are only beginning to leverage current AI tools to automating the differentiation of candidates. When this is used on resumes, recommendations, and additional data points, we will see a lot more rapid execution on answering the question, “who could do this job?”
3) Productivity Tools: Automated scheduling, interview structure planning, reporting tools, relationship management automation, and others can put recruiters in a strong position to be highly efficient and effective at building world-class teams. This is professional tooling that is already 100% available, but perhaps less than 10% applied. This will change as recruiters share best practices and recruitment architects bring the tools together.
For Company Hiring Teams
Don’t give into using an agency just because one happens to have a candidate you might like. It’s unlikely or nearly impossible that this one person will make all the difference in your hiring. This may just be an indication that your recruitment process needs a tweak. On the other hand, when looking for a rare hire that you only need every once-in-a-while, i.e., an HRIS admin, single accountant for the whole company, or an executive over 1,000 to 100,000 people, it can be useful to rely on the capabilities of highly-specialized executive search or job-focused search companies. Be proactive in identifying each of these hiring types among your list of total hires, and intentionally choose which ones to seed out to agencies.
If you find yourself in an agency focusing on full-time hires, you may want to re-think your seat. Unless you’re specialized at a level that most clients come directly to you, your company will probably not survive beyond the 3-5 years without making some drastic changes. Seek out internal recruiting opportunities or consider going independent or joining a team of independent operators that charge reasonable prices for the service, rather than exorbitant fees for the candidate.
For agency managers and owners
Well, in line with the suggestions above, I recommend heading rapidly toward the more sustainable profit models of specialized staffing of consultants, specialized executive search, and/or recruitment as a service. I feel like I’m beating a dead horse when I say that fee-based placement activity is now a negative profit zone.
Just a couple of caveats:
– My experience is particular to technology and engineering recruitment of professionals with specialized degrees.
– I’ve recruited across almost every continent and a number of countries and cities- every region is slightly different in the strength and timing of my points.
– I am highly biased toward people being able and empowered to do highly professional and engaging work, including recruiters.